Despite Debt Deal, Damage Done

Con­gress and Pres­i­dent Obama reached a last-​​minute agree­ment on Tuesday to raise the nation’s debt ceiling, and avoid default. How­ever, the crisis has dam­aged the United States’ standing in the world’s economy, according to Kamran Dad­khah, an asso­ciate pro­fessor of eco­nomics at North­eastern University.

Will this debt crisis have a negative impact on the American economy, even though Congress passed an agreement to raise the debt ceiling before a default occurred?

Yes. It dis­played dis­cord among leaders at a time of crisis. There was already an aura of pes­simism among investors, con­sumers and workers. Such dis­cord rein­forced it. Many econ­o­mists and politi­cians, when talking about Key­ne­sian eco­nomics, empha­size Keynes’s idea of increasing gov­ern­ment expen­di­tures to combat reces­sion, but Keynes’s emphasis was on opti­mism among investors. A crit­i­cism of Pres­i­dent Obama is that he does not create opti­mism as Pres­i­dent Reagan did in the 1980s. To be sure, in the short run, people and the economy will get over the effects of this discord.For the long run, how­ever, damage is being done to the United States’ standing in the world economy. Here is the largest economy and the greatest nation in the world facing default on its debt and down­grade of its bond rating. The world economy is depen­dent on the U.S. dollar and on con­fi­dence in the health and sound­ness of the U.S. finan­cial system. This is an impor­tant issue that needs to be addressed.

With the debt ceiling raised, what needs to be done to ensure a fight like this does not occur again?

Nothing can be done; there is a poten­tial for this to happen again. Some have sug­gested a bal­anced budget amend­ment to the Con­sti­tu­tion to avoid the problem alto­gether. This is not a good idea for at least two rea­sons: First, the Con­sti­tu­tion is not the place for spe­cific eco­nomic rules. Second, and more impor­tant, there are times when, for eco­nomic or polit­ical rea­sons, there is a need for deficit spending.

Another sug­ges­tion has been to dis­pense with debt ceiling alto­gether. The argu­ment is that, when the time comes, the gov­ern­ment raises the ceiling anyway. The point is well taken, but dis­pensing with the debt ceiling is to dis­mantle an impor­tant part of the system of checks and bal­ances. Yes, there will be a lot of pol­i­ticking, but it also gives a chance for the public to observe when the gov­ern­ment is spending well beyond its means.

Of course, we should note that the crisis hap­pened at a most inop­por­tune time. The economy, while offi­cially out of reces­sion, is still anemic. Fur­ther­more, the employ­ment sit­u­a­tion is dis­cour­aging. The next crisis may not be as severe.

This plan reduced spending but did not raise taxes — was that the best choice for lawmakers?

Not to raise taxes in the first stage was the right thing to do. The economy is not doing well, espe­cially with regard to employ­ment. Raising taxes at this stage would have killed more invest­ment projects. In the second stage, when the bipar­tisan com­mittee is formed, some believe raising taxes will be an option. But I believe raising taxes will not reduce the budget deficit. Gov­ern­ments spend what­ever money they have and then some. The best way to reduce the budget deficit is to starve the gov­ern­ment and force it to curb expen­di­tures. Fur­ther­more, lower taxes stim­u­late the economy and will increase overall tax rev­enues, reducing the budget deficit.

–  by Matt Collette